March 29, 2011
Early Budgeting Helps Owners Secure Financing
A few years ago we saw the collapse of the financial and housing markets. This collapse created a significant shift in laws and regulations surrounding lending and borrowing for new construction projects. These changes have made it much more difficult to secure project financing today in comparison to the construction boom of the 1990’s and early 2000’s. Lenders now expect a guarantee on the size, scope, cost, and cash flow of the project before a shovel is put in the ground, and in some instances, before a piece of property is even purchased. As contractors, we need to recognize the challenges our customers are facing and provide delivery solutions to help them build their financial Pro Forma’s they can sell to the banks. A few ways we have found success in assisting in this process is by providing conceptual estimating and Target Value Design services.
Conceptual estimating is typically applied when the sub-trade partner is provided with scope specifications and basic architectural drawings from a construction manager or general contractor for a new building. This process is a blend of the art and science of estimating to create a budget with very limited project information. The science side of the equation is the historical data and information on past projects of similar size, scope and quality that have been bid and or built. This data can be stored in many different forms from square foot cost and per unit cost to cost per living unit, cost per detention cell, or cost per student just to name a few. The art side of the equation is a skill needed by the project team to fill in the gaps by making educated assumptions based off of years of experience. The art side needs to respond to what the owner perceives as value while balancing the cost side of the equation. Combining these two skills will create an accurate budget with a defined scope that can be used in the financial Pro Forma.
Target Value Design is a process getting a lot more traction with the evolution of the Lean Construction Institute’s practices. This process begins by establishing an overall project budget for all divisions and sections of work. The major sub-trade partners participate in the development of a design and budget alongside the other team members. In this model, the owner, construction manager, designers and sub-trade partners collaborate on design concepts and solutions to the owner’s building program. The sub-trade partners will participate in the design of the specific systems and provide cost estimates based off of the designs. Not only is cost being identified early in the design process, but value, schedule, and constructability are also being identified, coordinated, and resolved.
These are just two examples of how sub-trade partners can assist in building budgets for early financing. There is a lot of value that sub-trade partners can bring to the table early that a typical designer and engineer may not be able to bring. The challenge is knocking down the vertical silos of the typical design-bid-build process to allow sub-trade partners to get involved earlier in the design and budgeting process.